M/I Homes Inc (MHO) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Markita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the M/I Homes first-quarter earnings conference call. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, CFO, Phil Creek. Sir, you may begin your conference.

Thank you very much and thank you for joining us today. Joining me on the call from Columbus, Ohio is Bob Schottenstein, our CEO and President, and Steven Schottenstein, our Chief Operating Officer.

First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call. Because, as you know, we are prohibited from discussing significant nonpublic items with you directly. We provided our 2006 earnings guidance in our press release.

As to forward-looking statements, this presentation includes forward-looking statements, as characterized in the Private Securities Litigation Reform Act of 1995. Any statements that are not historical in nature are forward-looking statements that involve risk and uncertainty that could cause actual results to differ materially from those in the forward-looking statements. Please refer to our most recent 10-K, 10-Q and earnings press release for other factors that could cause results to differ.

Be advised that the Company undertakes no obligation to update any forward-looking statements made during this call. The audio of which will be available on our Website through April of 2007.

It should also be noted that certain information related to the use of non-GAAP financial measures required by SEC Regulation G is posted on our Website. This information can be accessed by logging onto the M/I Homes Website at MIHomes.com, then clicking on the Investor Relations section of the site and selecting non-GAAP financial information reconciliation.

Now, we will turn the call over to Bob.

Thanks, Phil, and I also want to thank you all for joining us today. Our first-quarter results were basically in line with our expectations. We set a number of records for M/I Homes. As a result, we are now in very good position to make 2006 our eleventh consecutive record year.

A few highlights from the quarter -- net income was at 16.4 million and diluted earnings per share were $1.14, which takes into account a $600,000 or $0.04 per share after-tax charge as a consequence of the expensing of stock options. We produced record revenues during the quarter along with record gross margins of 27.3%. These gross margins frankly are 200 basis points better than last year and are largely as a result of a mixed shift in closings, where more homes were closed in Florida than we had anticipated. Our Florida closings represented about 40% of total Florida closings versus 30% a year ago.

Increases in selling, general and administrative costs offset the improvement gross margins, as we experienced a number of increased costs -- which Phil will refer to during his presentation -- in order to position the Company for growth as well as incurring expenses related to stock options. Overall, however, our operating profit margin remained very solid at 11.4%. New contracts and homes delivered during the first quarter of '06 increased 5% and 7% respectively. Our Florida operations had a very strong quarter, with new contracts up 11% and homes delivered up over 40%. Likewise, we experienced and continue to experience strong demand in our North Carolina operations, where new contracts increased over 50% and homes delivered increased by more than 20%.

We achieved the highest first-quarter backlog in our Company's history, with the sales value of that backlog increasing to $1.1 billion. In addition, the average selling price of homes in backlog also reached an all-time record for M/I Homes, hitting approximately $346,000 per house.

In terms of our active communities, we increased our communities from 130 a year ago to 155 today. We are on target to increase our communities to 175 active communities by year end. As previously stated in our earlier call this year and calls late last year, on a net basis, all of our new communities are planned for our stronger markets in Florida, North Carolina, and Washington, D.C.

In the first quarter of this year, we continue to allocate capital to our higher return markets, purchasing $110 million worth of ground in the first quarter. For the year, we anticipate purchasing approximately $200 million worth of ground. This represents a reduction from our earlier projection, wherein we indicated we would purchase $250 million worth of ground. Of course, if we conclude this year with $200 million of land purchases, that will be down from last year's 320 million. We continue to look very carefully at our land purchases. With softening market conditions and challenges in a number of our markets, we think this is absolutely the prudent thing to do. We also repurchased $13 million worth of stock during the first quarter.

Let me first make a few comments on our outlook for 2006 before we take some specific look at a number of our individual markets. The Midwest continues to be challenging. It has been for over a year and conditions have not improved. In some respects, they may have gotten slightly worse. We believe they have bottomed out. The softening conditions in the Midwest impact both demand for housing and margins. On a select basis, we continue to offer incentives to stimulate business.

Washington, D.C. -- our operations there have experienced slower new contracts than we anticipated as a result of higher cancellation rates, what we believe is a very significant overhang from the existing homes on the market, and speculators having exited the market and having been a greater part of that market perhaps than we and many others anticipated. There is significant discounting going on in that market by many of the major builders, and that is having a big impact on margins. We have not discounted as much as many of our competitors and will not because we think eventually, the conditions in Washington will return to more normalized levels. However, and no one knows for sure, but we really believe that the conditions, which are soft today, will remain soft for the foreseeable future, but we expect conditions to loosen up and improve slightly by the end of this year and hopefully return to fairly decent levels by the first quarter of next year, as the underlying fundamentals relating to job growth and other factors that would influence the strong new home market remain very positive in terms of the long-term outlook for Washington, D.C.

North Carolina -- our operations in Charlotte and Raleigh have shown and continue to show very strong results. We are growing significantly in both of these cities, and we continue to see improving margins in our backlog. We expect to close about 600 homes in Charlotte and Raleigh combined this year compared to less than 400 last year. Next year, our closings should exceed 1,000 homes in the state of North Carolina.

Florida also continues to be a strong performer. While conditions in Florida may have softened ever so slightly, by any measure, the demand for housing and the ability to sustain very good margins is still very, very present in Florida, at least in the up markets that we do business in. Our March 31 backlog in Florida is higher than last year by over 30%, and our community count for this year is expected to increase by over 70%.

With our new contract activity to date not being as strong as we had planned, we are as you saw from today's press release reducing our 2006 expected deliveries, which were projected to be at around 5,000 for the year to 4,750. We also now believe that gross margins will be slightly stronger in 2006 than we had earlier estimated in February of this year. We're now assuming that for the year, our gross margins will only decline around 50 basis points from last year.

In all, we are reaffirming our previous 2006 EPS guidance of $7.55 to $7.75 per share. We fully expect second-quarter deliveries to be around 950, and we also fully expect that a significant portion of our annual deliveries will come in the second half of the year with over 1,200 homes closed in the third quarter and over 1,700 homes closed in the fourth quarter due in large part to the timing of community openings and the mix of homes in backlog.

Now, let me review the specifics of our individual markets. Columbus Ohio -- new contracts for the quarter were down about 5% for 2005 same period. We have made significant changes in our Columbus operation in terms of people and expenses in order to right size the business as market conditions have slowed significantly. Backlog units have decreased as a result of slower sales. However, our average selling price in backlog is about the same as it was a year ago at $300,000 per house. We currently expect deliveries for the year to be around 1,450 units, which is about what we delivered in Columbus back in 1998. Frankly, we think market conditions in Columbus have receded back to levels, which existed in 1997, 1998, 1999, where there was around 7,000 to 8,000 new home closings in this market, down from over 10,000 new home closings just a little over 1.5 years ago. We actually believe our market share in Columbus has increased, as we continue to focus on the fundamentals, which we always have focused on -- customer service and quality.

Cincinnati -- backlog units and sales value are both down approximately 20% from a year ago. The average selling price of homes in backlog at the state level were $225,000 a home. Like Columbus, the Cincinnati market is also sluggish, perhaps not down as much as Columbus but it has also been hurt by a number of factors, not the least of which are some -- are Ford plant closings and the overall weak Ohio economy. We do not anticipate market conditions in Columbus and Cincinnati to improve much if at all over the next 2 to 3 years.

Indianapolis -- for the first quarter, our new contracts were up approximately 5%. Backlog units and sales value both declined from the prior year. However, average selling price increased slightly to $195,000, up from 185,000 a year ago. We have also begun to move towards a more higher end product offering in view of what we think is a greater demand and an ability to attract higher margins with higher price product. We expect to continue to produce slightly higher sales and closings in 2006. While we believe market conditions in Indianapolis are slightly better than both Cincinnati and Columbus, we also don't believe and are not planning on any meaningful improvement in that market over the next 2 to 3 years as well.

Those comments are more micro than they are micro in nature. Overall, our margins in the Midwest today as a result of weakening demand incentives and just general economic conditions have declined to levels of between 18 and 19%. On average, 2 years ago in the Midwest, our run rate on March gross margins was between 23 and 24%. So, you can see they've dropped nearly 500 basis points.

Tampa, Florida -- Tampa continues to be one of our strongest markets. Homes delivered for the quarter were up over 40% from last year. Our backlog -- units in backlog have increased over 30% from a year ago. Our average selling price has increased nearly 20% to $325,000 per home. Our land position is excellent. We expect to deliver over 800 homes in Tampa this year and more than 900 homes in Tampa next year and more in 2008. We remain very bullish on the Tampa market.

Orlando, a very similar story, bolstered in part by our acquisition last year of Shamrock Homes in Lake County, Florida. That acquisition continues to progress very well, and our comments about our Orlando operations include the Shamrock operations in Lake County. Our business in Orlando continues to be very strong, maybe not quite as good as it was 6 months ago but still strong by any measure. Margins are among the strongest in our Company. Backlog units have increased over 20% from a year ago. Average selling price has increased by more than 30% to approximately $400,000 a home. We have an excellent land position in Orlando, project to close approximately 800 homes in the greater Orlando market this year and over 900 in 2007. We also remain very bullish on the Orlando market.

West Palm Beach is currently our smallest -- the smallest of our Florida operations and as a result, comparatively the weakest. But, on the other hand, both backlog units and average selling price in backlog have increased by more than 20% from a year ago. We expect to have very strong results in Palm Beach this year, delivering more than twice as many homes as last year. Our outlook for Palm Beach is not nearly -- at least short-term -- as robust as it is for Tampa and Orlando. But, we think long-term, Southeast Florida still is an excellent home building, as it will present an excellent home building environment.

Overall, in terms of Florida, while conditions may have softened ever so slightly, our gross margins continue to exceed 25%, demand continues to be good and we are very excited about our Florida operations. 2 years ago, in calendar year '04, we closed 1,000 homes in Florida; last year, 25% more than that. This year, closings will exceed 1,800 homes. Next year, we will close more than 2,000 homes in the state of Florida. Nearly 50% of our land purchases this year are planned for Florida.

Charlotte -- our business has improved significantly there. First-quarter sales more than doubled -- or were more than doubled than what they were a year ago. We project to sell about 400 homes in Charlotte this year, which for M/I Homes will be the best year we've ever had. Our land position is the strongest it's ever been. We expect to close over 500 homes in Charlotte next year with a very significant increase of profitability, and we think Charlotte is a very good market today and will remain so for at least the next 2 to 3 years. We are as bullish on North Carolina as we are on Florida.

Raleigh -- first-quarter sales decreased slightly; that's mainly a function of community count. We've worked hard to improve our land position, and we've been successful in doing so. Our land position today is in the best shape it's ever been. We project sales to increase over 50%, as we significantly increase our community count. This year, we will close around 250 homes in Raleigh. Next year, closings should exceed 400. As I said before, we are very strong and high on the Raleigh market.

Washington, D.C. is somewhat of a puzzle. I think a lot of people are puzzled by the Washington market. I think we know what the problems are today, but we just don't know when exactly they are going to end. As I said before, we expect the conditions to remain soft through most of this year but to begin to brighten as the year comes to a close and in view of the underlying job growth fundamentals. Our financial results are very strong in this market. Our backlog units are down from last year by over 10% because of the challenges we've experienced with new home sales and higher cancellations. We have refrained from getting down into the heavy discounting and will continue to do so. We have a very strong land position, and we've got patience when it comes to this market and believe that Washington will this year and in the future be a very solid contributor to M/I Homes' profits.

Overall, from a margin standpoint, in terms of North Carolina and Washington -- the area, which we call Mid-Atlantic -- our margins today on average are over 23%. A year ago in Charlotte and Raleigh, they were in the low 20s. They've moved up to over 23. A year ago in Washington, they were in the upper 20s. They've declined to more around the mid to lower mid 20s. So, on average, we are slightly over 23%.

With that, I'll turn it over to Phil to more thoroughly review our financial performance.

Thanks, Bob. 2006 first-quarter new contracts were 1,137, which was up 5% from the same period in 2005. For the quarter, traffic decreased 6% and our cancellation rate was 25%. This cancellation rate compares to 19% in last year's first quarter, and our increased can rate was primarily related to our Columbus and Washington, D.C. markets. Our sales were up 28% in January, which we are pleased to report was also a January all-time record. In January, our traffic was down 3%. In February, our sales were up 26% with traffic being down 10%. In March, our sales were down 22% and traffic was down 4%.

Our community count was 155 at March 31, '06 versus 130 a year ago and 150 at 12/31/05. We currently have 90 communities in the Midwest, 33 in Florida and 32 in North Carolina and D.C. We continue to project 160 new communities at 6/30/06, 165 new communities at 9/30/06 and 175 communities at year-end. The 175 at year-end is estimated to be 85 in the Midwest, 50 in Florida, and 40 in North Carolina and D.C. Homes delivered in the first quarter were 832 compared to 775 for '05's first quarter, up 7%, and we had projected 850 closings. We delivered about 30% of our backlog in the first quarter, which is comparable to last year. As expected, we had increased deliveries in Florida and North Carolina.

Revenue increased 7% in the first quarter to a record 259 million compared to the same period a year ago, and the average sale price of homes closed for the first quarter was 298,000, up 7% from last year's first quarter 278,000. This lower than backlog average first-quarter price was due to fewer D.C. closings, which are higher priced, and a higher amount of closings in Tampa, which are more affordable. That brought our average sale price overall down to 298.

Gross profit increased 10 million in the first quarter of '06. The margin percentage increased by more than 200 basis points to 27.3. These strong gross profits were due primarily to our increased mix of Florida closings. As Bob stated, we currently project that for the full year, our gross margin could decline around 50 basis points when compared to last year. This translates into about a 24.7% gross margin for full year '06 compared to last year's 25.2.

Land gross profit was about 150,000 in '06's first quarter compared to 1.2 million last year. Overall, that means our land gross profit was down 1 million. Land gross profit percentage was 9% for the quarter versus 14% a year ago. Last year, we had 7.3 million of land sales gross profit. We currently estimate we will exceed that amount for the full year '06. Our G&A costs in '06's first quarter increased 5.7 million and also increased as a percent of revenue. These increases are primarily attributable to the following -- expenses of 1.1 million related to our increased investment in land. We also had an increase of about 1.8 million due to increased personnel, systems, insurance and infrastructure costs to aid us in our planned growth expense of 900,000 per stock options -- the new FASB requirement this year -- and then $900,000 for amortization of intangibles and operating costs related to our acquisition of Shamrock Homes in July of '05. So, G&A costs as a percent of revenue was 7.8% for the first quarter versus 6% for the same period last year.

Selling expenses for the quarter also increased by about 4 million and to 8.1% of revenue. The dollar amount of the increase was primarily due to higher advertising and marketing costs of 1.3 million related to our community count growth as well as promotions to stimulate sales in certain of our markets. Our costs also increased by about 1.3 million due to models and sales offices due to our higher community count. We also had 700,000 of increased expense due to the mix of our closings being in higher realtor co-op participation markets and $400,000 related to the inclusion of Shamrock, again, which goes back to the acquisition of July of last year. Overall, our SG&A expenses increased to 15.9% of revenue in the first quarter compared to 13% last year. We do anticipate this to normalize and decline as a percent of revenue, particularly in the second half of this year when a greater percent of our closings will occur. Our current estimate is that for the full year of 2006, we will be in the mid to high 12% range for SG&A for '06 compared to 12.2 in '05.

Operating income in the first quarter was 11.4 of revenue compared to 12.1 last year. Interest expense increased 1.3 million for the first quarter. This increase was due primarily to an increase in the average borrowing from 288 million in '05 to 532 million for the first quarter of this year. The increase is also due to our weighted average borrowing rate increasing to 7% from 4.8% a year ago. The increase in this rate was due primarily to the issuance of our 6.875% senior notes in the second quarter of '05, which enhanced our capital position along with an increase in the borrowing rate, which is tied to LIBOR under our revolving credit facility. This rate increase was partially offset by a 4.5 million increase in capitalized interest, as we have more land under development when compared to the first quarter of last year.

We have 24.5 million in capitalized interest on our balance sheet at March 31, '06 compared to 15 million last year. This amount remains at less than 2% of our total asset. Our effective income tax rate for the first quarter was 38% compared to 39% last year. Our effective tax rate for '06 reflects a change in the estimate, resulting from the American Jobs Creation Act of 2004 and a change in State of Ohio tax from one that is income based to one that is based on gross receipts along with other changes in state taxes. So, for the first quarter, net income was 16.4 million compared to last year's 16.7 million. Also, as Bob mentioned, diluted EPS for the first quarter decreased to $1.14 from $1.16, but this included a $0.04 after-tax charge for stock options.

M/I Financial, which includes our title operations, their pretax income decreased from 5.3 million in the first quarter of '05 to 4.1 million in the first quarter of '06. This change was primarily the result of an 8% decrease in loans originated from 565 in '05 to 521 in '06. In addition, competitive market conditions have reduced our capture rate and impacted our profitability. Loan to value on our first mortgages for the first quarter was 81% in '06 compared to 82% last year. For the quarter, 88% of our loans were conventional with 12% being FHA/VA. This compares to 90% and 10% for '05's same period, and the FHA maximum mortgage limit in the markets we operate in range from 200,000 in Florida, Indiana, and North Carolina to 363,000 currently in Virginia and Maryland.

Approximately 41% of our first-quarter closings were adjustable-rate mortgages. This compares to 45% in the first quarter of '05. 28% of our first-quarter '06 applications were adjustable-rate mortgages compared to '05's fourth quarter of 34%. Of mortgages closed during the first quarter, 28% were interest-only loans; that compares to 33% in '05's fourth quarter. Overall, our average total mortgage amount was $231,000 in '06's first quarter. The average borrower credit score on mortgages originated by M/I Financial was 717 in the first quarter of '06 compared to 716 in '05's fourth quarter. These scores compare to 726 in '05's first quarter and 721 in '04's fourth quarter.

The percentage of customers that received downpayment assistance in the first quarter decreased to 4% versus 6% in '05. In the first quarter, the average mortgage balance on these downpayment assisted originations was 174,000 versus 179,000 in '05. The majority of these customers are in our Indianapolis and Columbus markets and buy our entry-level product. We sell our mortgages along with their servicing rights. Our contingent repurchase obligation due to loan delinquency is primarily limited to the first couple of payments being made timely. In 2006, we did not repurchase any loans.

Our mortgage operation captured about 76% of our business in the first quarter, a decrease when compared to '05's 82%. We believe there will be continued pressure on our capture rate due to the increased competition, as the mortgage business overall is slowing. We're constantly putting programs in place that we believe will help our capture rate. We constantly focus on our capture rate, since M/I Financial only serves M/I Homes customers. Overall, our mortgage and title businesses produced 14% of total operating income during the first quarter compared to 18% last year.

As far as the balance sheet, homebuilding inventories at 3/31/06 increased 42% over last year due primarily to our backlog and our land activity. Compared to a year ago, raw land increased 5%, land under development increased 191% and finished unsold lots increased 51%. At March 31, '06, we had 312 million of raw land, 313 million of land under development and 193 million of finished, unsold lots. Our total unsold land investment at March 31, '06 is 818 million, which compares to 534 million a year ago. The market breakdown of the 818 million of unsold land is 271 million in the Midwest, 310 million in Florida and 237 million in North Carolina and D.C. We constantly focus on our land investment. We currently plan on purchasing about 200 million of land in '06. The 2006 breakdown of these planned land investments is 15% in the Midwest, 50% in Florida, and 35% in North Carolina and Washington, D.C. As Bob mentioned, we continue to evaluate these land purchases.

At March 31, '06, we had 51 million invested in land joint ventures with 29 million of this being in Florida. These JVs are for land acquisition and land development purposes and are with homebuilding partners, which include Beazer, Centex and Avatar. Certain of these partnerships have third-party secured financing. We own 21,300 lots at March 31, '06 and have an additional 8,400 lots under our control. In total, today, we own a 4-year supply and control about a 6-year supply of lots for a total under control of 29,700. This is about 1,200 more lots than we had a year ago. The breakdown of the lots owned at 3/31/06 is 8,500 in the Midwest, 9,800 in Florida, and 3,000 in the North Carolina and Washington, D.C. markets. Also, the Midwest owned lots at 3/31/06 is about 500 less than a year ago. The breakdown by region of our total lots under control is 12,700 in the Midwest, 11,500 in Florida, and 5,500 in North Carolina and Washington, D.C. By percentages, our controlled land is 43% Midwest, 39% Florida, and 18% North Carolina and D.C. We have deposits and letters of credit of 22.7 million underlying our lots under contract, which represent about 6% of their value.

At the end of the quarter, we had $56 million invested in specs; 111 of which were completed specs and 284 specs in various stages of construction for a total of 395 specs. This translates into about 2.5 specs per community. Of the 395 total Company specs, 231 of these units are in the Midwest, 85 are in Florida and 79 are in North Carolina and D.C. This compares to 186 specs at March 31, '05 with 21 million in investment. The increase in spec levels from the prior year reflects our increase in community count, efforts to stimulate sales in older subdivisions, stimulate sales across the Midwest, as well as building and showcasing new product lines across certain of our markets.

At March 31, '06 we have 387 million outstanding under our revolving credit facility. We have 735 million available under this facility, which matures in September 2008. We currently expect to have peak borrowings in the second quarter of about 500 million. Long-term debt at 3/31/06 totaled 617 million compared to 330 million a year ago. This amount includes 200 million of public senior notes that mature in 2012 with a fixed rate of 6.875.

Homebuilding debt to equity was 99% at March 31, '06 versus 63% a year ago. Homebuilding debt to cap was 50% versus 39% a year ago. We currently expect our homebuilding debt to cap to peak at approximately 52% at the end of the second quarter. We also expect this ratio to decrease to approximately 45% by year-end. Our target remains to be at approximately 50% or lower in homebuilding debt to cap.

Our interest coverage for the quarter remained strong at 5.8 times EBITDA. EBITDA for the quarter was 31.6 million. Interest incurred for the quarter was 9.3 million compared to 3.5 million in 2005's first quarter. At March 31, '06, shareholders' equity was 597 million with a book value per share of $43. We repurchased 333,500 treasury shares in '06 first quarter at an average price of $40. At quarter-end, we had 3.6 million shares in treasury at an average price of 19. We review our share repurchase program at our quarterly Board meetings and constantly review our capital allocation, including stock repurchases and land acquisition. Our historical practice has to have been repurchase stock if it retreats to around book value. However, we always focus on our balance sheet and its leverage in conjunction with this practice.

In summary, we believe our financial performance in the first quarter was solid and it met our internal expectations and our financial position continues to be strong. Based on our quarter-end backlog of nearly 1.1 billion, our land position and our planned community openings, we continued to anticipate that 2006 will be our eleventh consecutive record year. We currently are reconfirming our previous diluted EPS guidance of 7.55 to 7.75, representing an increase of approximately 10% from last year. We will update this estimate as we release quarterly earnings in '06 as we have in the past.

With that, this completes our formal presentation. We will now open the call for any questions or comments.

(Operator Instructions). Joel Locker, Carlin Financial.

I just wanted to look a little closer at your SG&A. With it being up almost 280 basis points year over year just in the first quarter alone, just I guess the guidance only being up about 50 basis points for the entire year just seems a little -- just I guess doesn't jive with me. I'm just wondering if you had more explanation in the back half of the year of how you are going to decrease it year over year.

Well, I tried to go through in the release, giving detail on what happened in the first quarter. Obviously, you know, we closed about 800 houses. We'll be closing another 4,000, so we'll get a lot more revenue and leverage to our Company. When you look at what we spent the first quarter in advertising, doing promotions, we're not anticipating that that level of promotions would continue also. Also, in the second half of the year, from last year comparable, we had Shamrock Homes in there. The first half of this year, when you are comparing our numbers, Shamrock was not there. So, there is a couple of different things you have to take into account.

Then which items out of the G&A that you mentioned earlier do you expect to dissipate for the remainder of the year? Like, you said 1.6 million on systems investments for the growth in the future year. Is that a onetime charge kind of situation?

No. What I said was that we had 1.8 million in the first quarter compared to last year in certain areas to help us in our growth. I do not anticipate that going away. But, again, there will be a lot more revenues not coming to the Company. Also, again, the Shamrock Homes' cost were not in the first half of last year because we didn't acquire them.

Right, and then just the option expense too, that should be around 900,000 each quarter too, which wasn't in the numbers last year?

That's right. We gave guidance you know last year when we talked about the stock option expense being in the 4 to $5 million range for the year and that has not changed. It should be about 900,000 or so a quarter.

Already. On just the land, you already purchased 110 of the 200 million plans for '06. Now, what percentage did you purchase last year out of the 320 million that you purchased in '05 in the first quarter?

What I purchased last year in the first quarter, I purchased about 70 million the first quarter, 80 million the second, about 100 million in the third with the remainder the fourth. So, (multiple speakers) broke down in '05, Joel.

So, it's a little different breakdown where you purchased maybe 80% in the back half -- or the back three quarters. Whereas in this year, it will only be 40% or so?

Yes. The 110 in this year's first quarter was again about 40 million higher than it was in the first quarter.

Ivy Zelman, Credit Suisse.

This is actually [Allen] on for Ivy. I was wondering if you could go into a little more detail I guess on a quarterly breakdown of what you expect your closing price to do maybe on a regional level.

Our current view as far as average sale price for this year will probably be around 325 for the year -- is our view right now. When you start looking at that on a quarterly basis, we are thinking that it's going to be around 300 in the second quarter, 325 in the third quarter and probably 340 to 350 in the fourth quarter; that's what we say the average breaking down. As far as from a region standpoint, you really just need to look at kind of what the backlog is. As far at 3/31, we would see the Midwest probably being in the 280 range because the average sale price in backlog was 277 at 3/31/05, then 280 at 3/31/06, so it hasn't moved much. That would probably be around 280. Florida will gradually go up. The average sale price in backlog now is like 375, and we see the average sale price in North Carolina and D.C. being in the 400 or so range. It's skewed a little higher based on D.C.

That's very helpful. Have you guys purchased back any additional stock in April?

No, we have not.

Are there any order trends that you can discuss through the first few weeks of April that you didn't mention in your intro?

No, we're not going to.

(OPERATOR INSTRUCTIONS). Barbara Allen, Avondale Partners.

I want to thank you for such a thorough review of your operations and your market. It's very, very helpful. I hope that you are going to be rewarded with better valuations than some of your competitors, who are giving up less information instead of more (multiple speakers).

Well, I hope you are -- we appreciate you saying that. We hope you're right.

I hope so too. The market is a funny thing. But, I certainly appreciate it. I wondered if you could help me a little bit. I was intrigued by your comment about Florida softened "ever so slightly." Was that just due to your concern about West Palm Beach, or is it just something kind of a feeling? What is that about?

I think it's a combination of a number of things. First of all, Tampa and Orlando are still very strong. If they stayed like this forever, I think all of us would be very, very happy and produce very great results that our shareholders would be pleased to see. Having said that, there is a little bit more discounting, even by builders that sometimes claim they don't in the Tampa market. There's a little bit more discounting in the Orlando market. It's slight. There's probably a very slight softening of demand, maybe less of an order taking environment.

Now, the conditions in southeast Florida, we have never been a large volume builder in southeast Florida and maybe don't have as good a feel for the breadth and depth of that market as perhaps some of our competitors, who we've seen a little more of a softening in demand there. That was a very strong order taking market a year ago; I think it's much less so today. Whereas, in some communities, gross margins a year ago were approaching the upper 30s, they've probably retreated back to much frankly healthier levels in the mid to upper 20s, maybe low 30s. But, that's a lot more specificity with maybe how we would define "ever so slightly."

I appreciate that very much. Do you think that perhaps the East Coast of Florida had more speculators in it?

Southeast Florida for sure. Frankly, I think the -- this may be anecdotal, but my sense is that in Orlando and in Tampa, the large builders who are much more intent on trying to control speculators than perhaps in southeast Florida. Not sure why, but that's just a hunch that we have. I know that's -- a lot of our competitors have I think experienced that as well.

Well, I'm not sure it really matters because they just went into the resale market here in Scottsdale and Phoenix and drove the prices up there 48%. You know the ultimate outcome is you still have to compete with those higher prices. It may help your project that you don't have a lot of rental signs up. Certainly, that's better for your business I think long-term to prevent that.

No question.

I was trying to think of this one -- are there any other markets in Florida that you are thinking of expanding into? Or are you just going to continue to work on these three?

You know, honestly, we're always thinking about it. We continue to think about it, but we have nothing at this point that we could announce.

In Columbus, where you mentioned -- thank you for giving us that perspective on what happened there. How on earth did Columbus get to 10,000 units 18 months ago, since it doesn't seem to me the economic environment was much better then? But I may be wrong.

I think part of it was a shift away from apartments into single-family as a result of very low interest rates and maybe overly aggressive incentives to lure buyers away from rentals. So, I think that some of the increase was at the lower end of the -- much lower end of the market. I also think that there was sort of a steady buy of this 6, 7% increase in new home sales that occurred between '95 and 2004. It just improved from 6,000, 7,000, 8,000 up to around 10,000 to 11,000. That's why I think it was probably 1,000 units or so worth of volume in that sub $150,000 market that we've frankly not been in for quite some time that historically was reserved for apartment dwellers.

They came out because of no downpayments and very low interest rates probably?

Whatever. Yes.

Yes, it sounds like it. Then, there was one other -- if I can -- oh darn, it's just about slipped my mind. I'll get back in the queue.

Jason Rodgers, Great Lakes Review.

Do you have a total debt figure as of March 31?

A total debt figure as of March 31 -- what I show is there was 387 on the homebuilding side, 25 million on the mortgage company, 200 in senior notes and then about $7 million in mortgages. So, if you add that number together, the 387, the 25 and the 7 and the 200, that should be the number for total debt.

The decline that you had in March, was that mainly due then to the Washington, D.C. market, the deterioration there?

The sales drop-off in March?

Right.

Well it wasn't just --

Well, it wasn't just Washington. It was -- Phil, (multiple speakers) the specifics (multiple speakers). Washington was certainly part of it.

Yes, when you look at it, really, it was across all markets. Florida in March was a push. The Midwest was off, and Charlotte actually was up, so D.C. was down. So, again, Florida was a push, the Midwest and North Carolina and D.C. were off about the same amount. That's what drove the decrease.

What was the most significant change in the markets from January and February being up this strong to March following as significantly as it did?

One thing about it, make I am looking at comparables. Generally, January, February, November and December tend to be your lower amounts of sales, so the numbers don't have to move all that much to change the percentages. So, that's kind of one of the reasons for the big movement in January and February. Last March, we had pretty strong sales. Again, also, one of the things that impacted it was that we were probably a little more aggressive on promotions in January (multiple speakers) and February in the Midwest.

That's no question. We were promoting exactly what Phil said -- more aggressively in January and February in Columbus, Cincinnati and Indianapolis than we were in March. Then, even in hindsight, that was the right decision just to slacken back on the promotions. But, I also think that the Washington market has -- I think it became more challenging in March than it was late last year and early this year. Sometimes, you can't -- if you get too focused on monthly costs, you lose sight of trends because it can have to do with community openings and community exits on what kind of blocks your offering in one particular monthly period of 1 year versus the same period of the year ago. So, it was pretty much across almost all the markets.

If you look in D.C., if you look at '05, my cancellation rate in D.C. was about 15%. My cancellation rate so far this year in D.C. has been about 25%. That's been a significant increase.

Nationally, there's -- I think you all probably are aware of this. Nationally, there's been quite a spike amongst the large homebuilders in cancellation rates year to date versus frankly the last 10 years. That condition probably will continue for the near-term.

Ivy Zelman, Credit Suisse.

It's actually Dennis with a quick one. Just thinking generally in a market like D.C. where you've highlighted the incentives already in a market like Florida, where you could theoretically see an increase in incentives going forward, do you think that there would be risks to your orders if those markets became more prevalent with incentives? Or would you likely match some of the incentives or get more aggressive yourselves to keep orders where you would like them to be?

It's really hard to answer that. We've -- you know the builder's willingness -- well I guess we will speak for ourselves. Our willingness to resist incentives in a particular market is going to be based on a whole host of factors, such as how deep and long our land position is there, what kind of risk dollars we have in communities, overhead, just so many different factors. There are so many things you could say it's market to market, community to community. You just have to assess the situation at the time.

There has been some very deep discounting in the Washington market, not by us. We're not one of the five largest builders in that market; although, we have a very solid operation there. But, we also think that it makes sense for us to be patient there because we have a great land position. We also have some of our best new communities that we've ever had there yet to open later this year that we can't wait to get opened; the opening of which has been held up largely by just the entitlement process.

So, (multiple speakers) I don't think that you could -- I would not in any way speculate on what we would do in a particular market. I think that's something that we would look at and evaluate. Every situation is different. We were fairly aggressive in our promoting in the Midwest, yet we weren't in Washington. So you say why? It was just a decision we made based upon what we thought was in the best interests of our balance sheet Company.

Dennis, you always have situations where when there is significant discounting in the market, you have certain people that are in your backlog that come in and say, gee, somebody down the street is offering 50,000 off. What will you do for me? Hopefully, we are able to keep those people in contract and get them to closing the majority of the time. I mean, sometimes, you have to deal with some of those issues. As Bob said, it's an individual situation. Hopefully, you have a significant amount of deposit from the people and you work through it. But, consumers are very educated, very smart. They know what's going on in the market. Hopefully, the quality of our locations and our product keeps them in the deal. But, that's something you have to deal with in these difficult markets.

So when you look at Washington, D.C. and you said you expect the markets [tweaks] up through the end of the year. You're basically assuming absorptions there remain challenged and are probably down a similar level they have been in and any improvement will be driven by new community openings, not the market.

I think that's a pretty fair statement. We hope we are wrong on the downside. But I do think that long-term, it's a great market. I'm glad we are there, and we love our land position there. We think it's going to contribute solidly to profits and the growth of this Company.

Dennis, you may recall that when we announced year-end numbers in February, we talked about closing 250 homes in the D.C. market last year. The guidance we gave in February of this year was for about 350 closings in D.C. Today, at this call, we are talking about 300. So, we are definitely feeling the impact of that. But, the way our business tends to work except for specs that are pretty far along, in most of our markets, we need to get those houses sold by June/July to get them closed this year.

But in an instance like D.C., where you are comfortable with your communities coming down the pipeline, you don't feel you have enough overhang on the cost side that you have to sell incremental units?

No. We do not.

We do not.

But that may be (multiple speakers) market.

No, but we agree with your statement.

But, that may change by market?

It definitely changes by market. It's different when you are going from 250 to 300, then in Columbus, we went from 2,200 to 1,450. I mean, it's a lot different issues with your investment levels and so forth.

Barbara Allen, Avondale Partners.

I wondered if you could share with us some of your analysis of the D.C. market and why you think it's still -- it's going to take to the end of the year to I guess stabilize?

Well, I'm not sure we have a very scientific answer. But, if you look at the used homes on the market, they continue to go up. There continues to be more resales today than there even were 30 days ago -- the latest information that we saw. There continues to be very deep discounting by the largest builders in that market. There's a lot of standing inventory on the ground.

Cancellation rate continues to --

Thank you. Our cancellation rate continues to be above the par there. I guess that you know all in all, you would like to hope and believe that by mid summer, things are going to begin to open up and they may well do that. I would love to have all of our new communities open and then really make this statement. Based on what we know right now and where we see things, we're not counting on much improvement till later this year. We are convinced and I think this opinion is shared by many that at some point in the not too-distant future, what is clogging that market will unclog. We can't have all that job growth without new home sales.

Also, we try very much to plan for our business to be a little bit conservative. If business does get better, we can react to that very quickly. So, we try to be a little conservative in our plans also.

Even once the demand comes back, I wouldn't see margins improving for -- I think it will take a while to inch margins back up. It's just I think sort of the way of the world.

I think that's true as well. How do you train your people to adjust to the problems from the resale market -- that is, the people who have to sell one of their houses to move into one of yours?

Frankly, the question of training salespeople, which this is the first training question I think we've had in 5 years, which I think probably says more about what's been happening in the housing market than maybe anything else. Because, that should be one of the focuses, which -- one of the items that is focused on maybe more intently than anything else, that's largely the front door to our business and always has been.

Phil got a lot of questions about SG&A. We have spent and bulked up significantly with our internal expenses on comprehensive training, started about 1.5 years ago. We have poured a lot more time and effort and money into it. That's just part of the process because you can say on the one hand that the biggest competitor that we have ever had and ever will have is the used home market. That is true in terms of numbers. But, there's also a lot of builders out there building new homes that we have to compete against as well. People -- we're always focusing on trying to teach our salespeople what the difference in the qualities and features are of an M/I Home. That's what's going to long-term separate the real quality builders from the pack. It's a lot of things though.

I agree. It's very difficult to do. But I have seen in previous cycles, some builders hold their backlogs better and I think that's due to training of the salespeople.

Yes.

I agree with that.

Yes. There is still a very strong demand for new housing in Washington.

Oh, sure! Are you seeing any of the other builders, not just the public ones continuing to build speculative -- of course, I know none of them ever built speculatively before now -- but, are we continuing to see that? Or, are they facing reality and cutting back on their start?

Are you talking in all the markets?

No, D.C.

I'm not sure that I could answer that as narrowly as you ask it. I'm not sure that I have that information. We can try and get that.

But, if you look at the data --

The data would suggest that there's still a lot of specs being built in the market.

The unsold inventory continues (multiple speakers) --

I don't know who's -- but in terms of who is building it, I don't know that I have that information.

Okay, so it doesn't seem like there's been a marked change in expectations by the building community there?

Our business started getting softer last October, and it has really just kind of stayed the same way for the last few months.

A little worse recently.

Maybe a little worse recently.

Okay, so, the rising cancellation is overall. But you said that was due primarily to Columbus and D.C. Columbus, I can see maybe a weakening economic environment. The rising cancellations in D.C., is that they cannot sell the house they are in or was--?

I think it's a combination of a lot of things. But one of the very significant is the heavy discounting on the market. If someone is in contract to buy a home that 90 days ago was $50,000 more, they are going to cancel. Or, if there is another builder that is saying it's $75,000 off -- at some point, it's tough to hold the deals together.

But, just for clarification, we do not report new orders that have contingencies for houses to sell or houses to rent. We will obviously take that contract, hopefully get a deposit, deposit the money and put the contract in the drawer. But, we will not report that sale publicly until that contingency is cleared. That person has to have their house sold. Now, if the person were to not get closed on their house, I would have a cancellation. But, if somebody comes in and buys the house from us, has the house to sell, that does not get reported under our system.

It doesn't until they clear that contingency?

That's right.

Joel Locker, Carlin Financial.

Did you specifically mention the cancellation rate in the D.C. area (multiple speakers)?

In the first quarter of this year, Joel, it was about 25%.

That was industry or for the companywide or just first for D.C. particularly?

The total Company, the first quarter of this year was 25% and D.C. was also 25%.

So, they are both 25%. Just with all of this kind of going on, does it almost seem -- it seems like maybe an NVR was like a first mover, who discounted first. And then even to try to discount 5 or 10% from here may be -- is it possible that you wouldn't even get the revenue, so it's not even worth really trying to play that game if you are the third or fourth builder to try and actually discount say 5 or 10%?

Well, again, it's going to differ from locales to locales, even within the greater Washington market. The fact is we have lowered our margins. Our run rate in Washington, D.C., today, our gross margin run rate is about 400 or 500 basis points down from where it was a year ago when it was in the upper 20s. So, we've had to lower our margins just to get some level of demand. But to go much further at this point, I think that right now, we see it the way you do.

Right. Then, I mean have you delayed phase releases within the individual communities, then just pushed them out? Maybe you are doing them every 6 to 8 weeks and now, you're just maybe every 3 or 4 months? You're waiting until you sell off the existing phases or at least close to being done before you release the next phase?

No, we've not had that issue. Also, for your information, as far as average sales price in backlog, at 3/31/05, the average sale price in D.C. was about 675 and at 3/31/06, it was 710. So, our average sale price -- I realize land costs have escalated some. But, the average sale price has still increased over a year ago.

There appear to be no further questions at this time.

Thank you very much for joining us. We look forward to talking to you again with the second-quarter earnings. Thanks.

Thank you. This does conclude today's conference call. You may now disconnect.